Stocks tumbled this morning as the rally of the last few weeks finally paused. Bulls were stopped dead in their tracks by disappointing Target (NYSE: TGT) earnings, which came as a surprise following a pair of earnings beats from Walmart (NYSE: WMT) and Home Depot (NYSE: HD) yesterday.
Target reported an EPS of just $0.39 for Q2, badly missing the consensus estimate of $0.79. This miss came even after the retailer had already issued two profit warnings in the weeks prior. According to Target leadership, the steep price markdowns on old inventory drove the big earnings miss.
Moving forward, however, Target insists that it is prepared to rebound strongly.
“If we hadn’t dealt with our excess inventory head-on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potential,” said Target CFO Michael Fiddelke.
“While our quarterly profit took a meaningful step down, our future path is brighter.”
The company left its outlook for 2022 unchanged, providing a much-needed silver lining to shareholders. TGT shares fell 3% in response.
But retail stocks didn’t lead the market lower today. Tech did.
The Nasdaq Composite fell the most out of the three major indexes. And, of the market’s many industries, semiconductors stocks were among the day’s worst performers.
Micron (NASDAQ: MU), Nvidia (NASDAQ: NVDA), and Advanced Micro Devices (NASDAQ: AMD) all sunk this morning for seemingly no reason other than the fact that they appear overbought. AMD, for example, soared over 46% from early July to early August before turning lower over the last 8 trading sessions.
Few industries had a better July than semiconductors. Now, though, sentiment is starting to sour amid elevated valuations not just in tech, but across the general market as well.
“We would caution investors against chasing this rally,” said UBS Global Wealth Management chief investment officer Mark Haefele.
“We expect renewed market volatility ahead, and we continue to recommend positioning portfolios for resilience under various scenarios.”
In other words, load up on suitable hedges while you still can.
And that window to do so may be closing with the July FOMC meeting minutes release approaching at 2 pm EST. Investors are concerned that recent price data (including double-digit inflation in the UK and strong retail sales, both revealed this morning) could push the Fed to continue with strong rate hikes.
“Particularly today, with the minutes looming, that’s the concern,” said Wells Fargo’s Michael Schumacher.
“The Fed minutes could be hawkish.”
Or, more accurately, the minutes could be more hawkish than Powell’s post-FOMC remarks last month. The market took Powell’s press conference as evidence that the Fed had officially “pivoted,” favoring a more dovish monetary policy in response to slowed economic growth in the US.
Stocks rallied as Powell spoke.
But in the days that followed, Fed officials clarified the Fed’s stance. They said that rates would probably be held higher longer than the market expected. Today’s FOMC minutes release should drive that narrative home.
With equities looking vastly overbought in the short-term and due for a selloff, anyway, that makes the FOMC minutes particularly dangerous to bulls.
Provided, of course, that the minutes actually turn out to be hawkish and not just another piece of evidence that bulls can point to when justifying current market valuations. Or, potentially, the next big leg up.